PSFU’s Catalytic Fund to offer patient, collateral free capital to SMEs 

More organisations have started offering non-collateralised credit to small and medium businesses, further moving away from the usual demand for assets to back the loan requests.

Private Sector Foundation Uganda (PSFU) is the latest organization to introduce non-collateralized loans with its patient capital that targets business development services to youths, women, and high-growth small and medium-sized enterprises (SMEs).

Damali Ssali, the PSFU chief programs and projects officer, during an online XSpaces session recently, said that many businesses have been locked out of the credit market because they lack the assets that banks require to complete the processing of the loan.

“In a country like Uganda, recognized as one of the most entrepreneurial nations globally, addressing these issues is of utmost significance. It is noteworthy that a large number of businesses in Uganda experience closure within a short span of two years due to challenges in accessing capital, limiting their growth potential and forcing them to remain small.

Secondly, many entrepreneurs initiate their businesses as side hustles, lacking the essential business skills needed to sustain and manage their ventures effectively,” Ssali noted.

Financial Sector Deepening Uganda has undertaken market research on unsecured lending and found that the “lack of a strong regulatory framework and high delinquency rates are significant factors that need to be addressed in order to spur unsecured credit growth in Uganda.”

The study recommended the enhancement of regulation, improvement of product features and developing better credit scoring to mitigate high delinquency.

According to World Bank data, only 14.2 per cent of the private sector in Uganda had access to credit in 2020 compared to 32 per cent that accessed credit in Kenya in the same period.

Financial sector stakeholders attributed these low numbers to, among others, high default rate, high interest rates and unfavorable working conditions.

Ssali said that “accessing the catalytic fund will require no collateral, offer interest below market rate, and repayment terms will be sector-specific with each sector having terms that align with how it operates. This is a Ugandan solution, built by Ugandans to address typically Ugandan problems.”

aBi Development Limited is one of those organisations that have channeled financing towards commercial banks such as Stanbic bank. However, many other banks such as Standard Chartered are offering unsecured loans, while other financial institutions such as Bayport are doing it.

Mastercard Foundation is one of those companies that are supporting PSFU with this fund. While the Catalytic Fund will start with an initial capital of $100 million, more monies are expected by social impact investors in the long run.  Discussions with the World Bank and the NSSF have already been held.

Stephen Asiimwe, the PSFU executive director, noted that initiatives such as the Catalytic Fund are part of the foundation’s refreshed Strategic Plan 2022–2025 that aims at championing inclusive and sustainable private sector development. He noted that going forward, PSFU is giving priority to projects that target youths, women and MSMEs as these have the hugest potential to transform Uganda.